When IMF managing directors become household names, you know the economy is in crisis. That fate, which has been inflicted of hundreds of millions of people across the globe over several decades, is now shared by Britain. Christine Lagarde's pronouncements on British economic policy yesterday were about as blunt as the IMF gets in insisting that a change of course is necessary, at least for a country not already in an IMF programme.

Her message was a simple one: current economic policy isn't working, and the British government will have to consider methods to kickstart recovery. These include cutting interest rates to zero and further quantitative easing by the Bank of England, including the purchase of corporate debt, not just government debt. Further measures such as cutting VAT and reducing national insurance contributions should be considered.

Her intervention has been widely reported as a call for a plan B. For those of us who have long argued for an investment-led plan B, superficially all of this ought to be very welcome. Anything that boosts the real spending power of ordinary people in the current circumstances can only be good, the admission that stimulus is needed is a step forward. There is talk of growth-friendly policies. Yet, somewhat contradictorily, she also said that the focus for government policy should remain the "structural deficit". How can this circle be squared?

This is achieved by pretending that the Tory-led coalition has already adopted growth-friendly policies and that simply some variation is required. In particular, the latest IMF consultation statement that Lagarde delivered suggests that, "the government has taken steps over the past year to make consolidation more 'growth friendly' through cuts in spending on items with low multipliers (such as public employee wages) to fund higher spending on items with high multipliers (such as infrastructure)".

This is untrue. Cuts to public sector wages are not "growth friendly" precisely because public sector employees are obliged, like everyone else, to spend the bulk of their post-tax incomes in the private sector. For evidence of the negative impact on the private sector from the cuts in public sector wages we need only to look to April's retail sales data released today. The slump in retail sales means that they are now below the level posted in July 2010, that is, immediately after the coalition's "emergency budget" in June 2010. It has been downhill ever since.

But it is also untrue that the government has used this "saving" to boost investment. The current government inherited a level of government net investment (after depreciation) equivalent to 3.5% of GDP. According to the Treasury's own forecasts, this will fall to -0.2% of GDP in the current financial year. The assertion that cuts to public sector wages have been used to finance investment is a fiction.

Instead, the government has resorted to a variety of methods to bribe, cajole or induce the private sector to increase its own investment. It is the continued investment strike by the private sector which is actually the cause of the crisis, both in Britain and in the industrialised countries generally. The response of the Tory-led government has been "credit easing", essentially an attempt to bribe businesses to invest.

The results of that policy are clearly failure. The Treasury's initial forecast when the coalition took office would be that business investment would have risen by more than 19% by 2012. It is now assuming a 1% decline. Bribing the private sector to invest is not working, and lower interest rates are also unlikely to be a panacea. This is because, as a result of the investment strike by businesses, non-financial companies in Britain are already sitting on a cash mountain of more than £700bn. It is this corporate saving which has also caused the government deficit. £700bn is approximately half of annual GDP. Just a fraction of this cash would be sufficient to recover all the output lost in the recession and begin to reverse the rise in unemployment. This could be achieved by levies, windfall taxes or an instruction to invest to the banks which hold the cash.

Cuts for workers and the poor and bribes to large businesses to invest have already failed. Only state-led investment can rescue the economy from slump.